Q2 2019 Earnings Call
Good morning, and welcome to Entercoms second quarter 2019 earnings release Conference call.
All participants will be in a listen only mode. This conference is being recorded I would like to introduce your first speaker for todays call Mr. rich mailing CFO and executive Vice President Sir you may begin.
Thank you hamper and good morning, and welcome to Entercom second quarter earnings Conference call. This call is being recorded a replay will be available on our company website. Shortly after the conclusion of todays call an adorable by telephone at the replay number noted in our release.
Should the company make any forward looking statements such statements are based upon current expectations and involve risks and uncertainties.
The company's actual results could differ materially from those projected.
Additional information concerning factors that could cause actual results to differ materially are described in the company's SEC filings on form.
Forms 10-Q, 10-K, and eight K., we assume no obligation to update any forward looking statements.
During this call we may make reference to certain non-GAAP financial measures. We refer you to our website at Entercom dotcom for a reconciliation of such measures and other pro forma financial information.
I'll now turn the call over to David field.
President and CEO . Thank you rich good morning, Thanks, everybody for joining us for our second quarter earnings call.
This morning, we announced a major expansion of our podcasting business with the acquisition to Pineapple Street media one of the top creators of leading podcasts and branded podcast in the country as well as an agreement in principle to complete the exit the acquisition of cadence 13 by acquiring the remaining shares in that company that we don't own.
We also announced the launch of our new radio Dot Com Sports Digital network.
As you know we are one of the country's two largest radio broadcasters with over 235 in the nation's top radio brands. The unrivaled leader in news and sports radio the home of radio Dot Com and the intercom audio network and the number one creator of original live local audio content, reaching over 170 million Americans each month.
And now by virtue of the moves we are announcing this morning, we are poised to become one of the three largest podcast enterprises in the United States and believe we are extremely well positioned for sustainable success in the fastest growing area of the audio market.
We're also making great progress in a number of other at key areas in our transformative scale driven growth initiatives, which we will share later on the call, let's begin with our second quarter financial results.
Second quarter revenues, and EBITDA were up 2.3% and 7% respectively, driven by strong growth in National network, and digital partially offset by declines in political events.
Excluding political revenues were up 3% for the quarter.
As you May recall, our revenues were pacing up better than 4% at the time of our Q1 earnings call, but declined over the remainder of the quarter due to a combination of slowing local sales and weaker than expected ticket sales at some of our largest events and some some to some degree attributable to weather issues.
It was the strongest month of the quarter with revenues up high single digits May was down low single digits in June was up low single digits.
During the second quarter, our best performing markets were Denver, Orlando, Philadelphia, Sacramento, Saint Louis Seattle in Washington DC.
Our strongest advertising categories included consumer products, which continued to surge along with telecom TV cable entertainment convenience stores home for change in education and ecommerce.
Our second quarter expenses were up 1% and are down slightly June year to date.
In the third quarter, we expect our expenses will be flat to down low single digits and for the full year, we expect that our expenses will be down around 2% as we complete executing our integration program and are also implementing other cost saving actions as we capitalize on new technologies and have the best practices. While at the same time fueling our investments across a number of growth initiatives.
As I mentioned this morning.
We announced the acquisition of leading podcast creator Pineapple Street media and also announced that we have an agreement in principle to acquire the remaining equity and cadence 13 that we don't already own.
As a reminder, we acquired.
Excuse me, we acquired a roughly 45% interest in cadence 13 on July 25th 2017, but have not recorded any financial contribution from this investment to date.
Together these two acquisitions will propel entercom into a leading position in the podcast space with a stellar content lineup strong monetization capabilities, an excellent distribution and discovery platforms across the company's radio stations and radio Dot com.
Combining entercom cadence or gene pineapple creates a business, which develops we're exclusively cells podcast. The currently generate more than 150 million monthly downloads.
As a point of reference pod Trac listed NPR is the number one publisher was 144 million monthly downloads.
Entercom will operate a best in class portfolio of top rated podcast, including Pineapple Street Media's the clearing which recently launched as the number one podcast on the Apple charts.
The network will also include over half of the titles named apples 10, best So far podcast list in 2019 with notable titles such as route of evil against the rules to live and die in L.A. running from Cobb spill the balls among many others.
In addition, our lineup will include top shows.
As Malcolm Gladwell as revisionist history, Michael Lewis is breaking the rules booking media's parts of America, and pre berardi stages with brief and much more.
Okay is ideally suited to compete effectively in this space due to the symbiotic cross platform opportunities enabled by our position as the country's number one creator of local premium word spoken word radio, including new sports talk and other highly rated local personalities with an audience of 170 million Americans monthly across our various platforms.
In addition, this morning, we announced the launch of the radio Dot Com Sports Digital network, which will debut later this month with a compelling lineup of daily life and weekly podcast that will augment our existing status as the country's unrivaled leader in local audio sports.
Among our new life daily shows will be you better you bet, which will be hosted by a top notch group of sports gambling experts, providing insights to interested fans across the country and creating new inventory for us to serve the rapidly growing sports gambling advertising category.
Together these moves will make entercom a powerful leading player in this rapidly growing segment of the audio market.
We also are continuing to make good progress in or other areas of strategic focus radio dot com remains the fastest growing digital audio up in the U.S. total platform monthly active users are up 82% over the prior year and our digital audio AD revenues are growing strongly.
That said, we are still a very small participant in the space, but believe we are well positioned to become a more meaningful player in the fast growing roughly $3 billion digital audio market.
Today's podcasting announcements along with other enhancements to the radio dotcom platform that will be implemented during the second half of 2019 should further enhance or radio dot com growth.
On a related note.
In June Apple and Entercom announced a strategic integration.
We'll bring all of the Entercom stations to the Apple music platform and enable a number of significant collaborative features that will bolster listening levels to our brands and provide a number of other benefits Apple selection of Entercom as one of its partners for the launch of the expanded radio experience and its enhanced Apple music platform is it telling reflection of the strategic significance of our leading platform of outstanding local brands personality and content.
I'd also like to very briefly touch on a few important areas of development across the company.
We are continuing to rollout new analytics and attribution products, where customers under the Entercom advanced audio banner as a result of the significant investment we are making in our data driven capabilities.
For example, we now offer an attribution product that enables us to demonstrate the impact of over the air radio advertising on foot traffic web traffic app downloads brand awareness and more.
Our national client partnership team continues to make progress in our work to elevate our relationships with many of the country's largest blue chip national advertisers radio remains a highly undervalued component of the media mix and more and more advertisers are recognizing that they are under invested in radio the nations number one reach medium offering superior ROI outstanding local activation and more.
Advertisers are increasingly receptive to rethinking their media mix to increase the radio spending although the timeline of the annual planning cycle and the work of changing perceptions and mindset. Some media means these types of changes take time, we expect these efforts to become an increasingly significant growth driver in 2020 and beyond.
Our intercom audio network launch continues to perform well as you may recall, we launched this new business on July one of last year and I've been very happy with our progress in the most recent quarter, we added a number of new clients, including Clorox fidelity Glaxosmithklines and Skechers.
Our balance sheet is in balance sheet is in good shape and during the second quarter. It was enhanced by two important moves we made to capitalize on attractive market conditions, which will elaborate on that a bit further.
Turning to an update on performance our practice has been to provide pacing information, but not to provide guidance frankly that approach has made us vulnerable to deceleration such as occurred during second quarter.
Starting now we will begin to provide revenue guidance. So we can provide better information to our investors by incorporating our market insights rather than just passing along a data point.
Third quarter comps will be more challenging.
As we had significant.
Traffic related revenue recoveries during third quarter, 2018, plus healthy political spending.
Currently third quarter is pacing up low single digits, and we expect to finish the quarter up low single digits as well.
We are continuing to see local sales improving sequentially with national digital AD network revenues each up significantly.
In fact, our spot radio business overall is having its healthy this quarter in some time.
However, events and political as mentioned a moment ago are both down in third quarter versus last year.
A few closing summary thoughts before turning it over to rich.
This morning's announcement headline a series of strategic initiatives and investments that we have been making to position entercom to capitalize broadly on the exciting growth opportunities in the audio space fueled by new catalysts, such as podcasting smart speakers and audio surge at the same time as advertisers are becoming more receptive to increasing radio share their media mix in light of radio's compelling and grass growing relative value proposition.
[noise] Entercom stands today as a unique leader in the audio universe with one of the two leading broadcast radio station groups. The best collection of premium original local audio content.
And now a top three player in podcasting what is with what is arguably the best national broadcast content.
The country's fastest growing digital audio out with radio dot com and Entercom advanced audio bringing to market a burgeoning set of data analytics and attribution capabilities.
We are growing in audio is in the midst of an emerging Renaissance and we are well positioned to participate in that opportunity.
Frankly, it is remarkable that in light of all this our stock continues to trade where it does.
Obviously, we don't control that but for whatever it is worth we see our stock valuation as it complete disconnect where we see the business and the strength of our platforms and assets and capabilities and the opportunities for growth and value creation that we believe lie in front of us. Thanks for that I'll turn it over to Mitch Thanks, David.
Our first quarter net revenues were up 2.3% were up about 3% ex political.
As discussed by David Peace and softened over the last two months of the second quarter.
National plus local spot revenues ended close to flat for the quarter and our digital revenue growth came in at 19%.
For Threeq you, we expect revenues will be up low single digits.
And ex political we'd be up one percentage point more.
Traffic advertising revenues are expected to be about a push versus prior year in threeq, you and us. The U.S. 10, there is now officially behind us.
Turning to our integration program, we had a very productive second quarter last couple miles of this program took somewhat longer to complete than we expected, but we have completed or near completing all of our integration program initiatives and we are on track to achieve total cost synergies.
That are in excess of $170 million and net cost synergies after ongoing operating expense investments in our growth initiatives.
$125 million or $15 million greater than our previously stated targets.
We have a number of further integration cost reduction actions that are scheduled to occur in the third quarter and a few more that will wrap things up in the fourth quarter. As a result, you will continue to see restructuring and integration charges in the third and fourth quarter.
And the full year total for such costs are expected to be less than 12 million. The upper end of our guidance range.
For the second quarter after excluding one time costs and adjusting out non cash items like DNA and miscellaneous income our total cash operating expenses came in at $293.1 million.
Were up 1% versus 290 $290 million in the second quarter of 2018.
And our total cash operating expenses are down slightly June year to date.
For the third quarter, we expect that our total cash operating expenses will be debt will be flat to down low single digits and we continue to expect that for the full year. Our total cash operating expenses will be down around 2%.
We now expect that net cost synergies for the full year will range between 40 and $45 million and that we will realize another $25 million or so of net cost synergies in 2020.
Looking at our financial position, our net debt at quarter end was about $1.67 billion and calculated in accordance with our amended credit agreement. Our first lien leverage was 2.6 times and our total net leverage was 4.6 times.
As previously reported on April Thirtyth, we issued $325 million of second lien eight though called threes secured notes at 6.5% and use the proceeds cash on hand and draw against our revolver to pay down the $425 million of our term limits.
We also amended our financial covenants to make it a first lien test as a result of this transaction are first lien leverage declined by over three quarters of a turn and the ratings on our first lien debt, where notched up by both Moodys and S&P.
In order to further mitigate or floating rate exposure in June we executed a 560 million amortizing interest rate collar that caps LIBOR at two and three quarters percent. It has a floor of <unk>, 0.4%.
And results in a fixed or cap rate for 76% of our outstanding debt at quarter end.
This call. This color allows us to enjoy the floating rate benefit of an over 80% decrease from the current one month LIBOR will read wall. Initially capping our term loan b floating rate exposure for $560 million of principal at 5.5%.
This notional amount amortizes over the five year life of this instrument based on our projected debt repayments.
Our net capital expenditures for the second quarter were $16.9 million for the full year. We now expect that our capital expenditures net of tenant installation allowances will be about $70 million. This is up from our prior guidance range of between 55 and $60 million due to added expenditures related to our acquisition of Nash from cumulative in New York City, and if you will who runs on several facilities projects, which will be fully completed by the end of this year.
With that we'll now go to your questions.
Camper.
Thank you we'll now begin the question and answer session. If you would like to ask a question. Please press star one you will be prompted to record. Your name. Please be sure to on mute your phone once again, if youd like to ask a question. Please press star one.
One moment.
Our first question comes from Marci Ryvicker Your line is open.
Hey, this is actually Eric Katzman from Marci This morning.
So she wanted to know if you could maybe walk through some of the puts and takes a bit more on what caused revenue to come in a bit lighter than the guided pacing I know you mentioned the local sales ticket sales, particularly towards the end of the quarter.
But if there's anything else you can elaborate on a bit more if would be helpful.
Yes, I know.
It's that's it.
We we did our call in early May.
We were pacing up mid fours at that point in time, we presented that data point.
Business slow down a bit after that and.
Obviously, we were disappointed with that.
The events in question.
We had a terrible weather at one or two of them and that didn't help but overall ticket sales slow down in the bench cost us about a point for the quarter and the remainder due to local slowing down.
Was it.
Is there any way to cut between maybe the ATM related station or CBS related stations on maybe what performed better perform a little bit softer.
Yep sure of our legacy CBF stations actually grew a little faster than legacy entercom during the quarter.
Our team has been doing great work around that we don't again internally, we don't look at there being any difference were all wearing one uniform and have been wearing one uniform for some period of time, but.
I know there is interest in that and so CBS stations legacy CBS stations actually outperformed in Q2.
Okay, and then just looking ahead to Q3.
Do you have any line of sight into maybe the back end of the quarter, just kind of seeing what happened in Q2, and what gives you confidence in Q3 hanging in there that pacing.
Well I mean, we're certainly sobered by the slowdown in Q2, obviously your eyes are wide open to that.
We were disappointed in that we.
Take a look at our business and obviously our people.
Report.
What they're seeing in the marketplace and as I mentioned, we are currently up low single digits and believe we will finish up low single digits.
Okay, and just one more if you don't mind.
The pod case, the podcast space feels a little crowded how do you differentiate yourselves with the recent purchases.
Yeah look it's we believe it's a great fit and a logical adjacent state. If you look at who is leading right now and how things are shaking out it looks like NPR Iheart entercom.
We think theres, a huge natural advantage from being an existing broadcaster.
If you look at the pieces, we put together here for what is a relatively small investment.
We have great content development and creative abilities to create great shows.
We have a great business development and AD sales monetization arm that we're getting through cadence 13, and then the ability to leverage our platforms and 170 million monthly listeners and the ability to showcase and add to discovery of podcasts across our platform of news and sports and local personalities. We believe gives us a very strong competitive advantage against others you might come into the space without that same footprint and so we look at this is an area, where we'll be able to achieve some significant growth overtime and value creation.
Great. Thank you.
Thank you.
Our next question comes from Aaron Watts with Deutsche Bank. Your line is open.
Hi, guys. Thanks for having me on.
One question on the cost side and Q on Q and then even thinking ahead I feel like cost came in a little higher than we were expecting and that you had.
Talked about coming out of the quarter was there anything material you call out there.
Again, not a drastic difference, but just anything in particular, you point at that cause costs to be a little more elevated.
Yes, well.
What I said Aaron was that.
Wrapping up the program.
Yes, definitely took longer than expected a number of significant actions that were enacted.
During the course of the second quarter.
We'll start seeing the benefit of those actions in the third quarter. We have a few things that are scheduled to be enacted.
In the third quarter and the fourth quarter, but for the full year, we do expect to get to our previous guidance of about down 2% for the full year. So its timing Ana and we do anticipate catching up rest of year.
Okay got it.
And then secondly, rich just given how QQ shook out what you're seeing in Threeq. You can you give us your updated thoughts on kind of your leverage targets, where you'd like to see leverage maybe at the end of the year and maybe even also at the end of next year.
Yes look I think it by the end of next year.
We hope to be.
At our target of about four times.
We'll make some progress rest of year, but not much and.
And your next year, we hope for.
We are anticipating of course, a strong political year.
We have further.
Cost savings actions.
In the gas tank.
More frankly going into 2020 than we previously anticipated I said earlier that we have about $25 million of added net cost synergies that we expect to realize in 2020. So.
No.
We do see our leverage remains a top priority for the company and and we're focused on.
On reducing it and hope to get to around four by the end of next year.
Okay got it and if I could add one last one here and I. Appreciate the time, just David maybe your view on the M&A.
Environments and how active it might be for stations as you look ahead in the next 12 months and how likely you think it is that entercom can participate.
Well I think as we said.
Exhibit.
I think as we've said consistently we're not we have no strategic need to make further acquisitions within the radio space and feel very good about the power of the platform. We have in the markets. We want to plan. So for us, it's all about being opportunistic and where we can create significant value and not.
Harm our balance sheet and so.
Will those opportunities present themselves over the next year I mean, it's possible, but I wouldn't look at it as a material part of our focus here in the near future.
Okay, great. Thanks for the time.
Thanks.
And next we'll go to John Ellis Palmer Square Capital Management. Your line is open.
Hey, guys. Congrats on a good quarter I just have one quick question a follow up recently in the past couple of quarters, you talked about the $2 billion.
Sports gambling market opportunity, how has that segment grown for entercom.
And this past quarter.
So it's growing.
And it's growing nicely at this point in time as you know sports gambling is only been authorized and a handful of states and so we expect that as more states legalized gambling, we'll be able to participate in that more broadly.
You May have also heard I you know in our remarks I noted that this radio Dot Com sports network that were digital network that we're rolling out.
We'll include a gambling specific show and we expect that show and perhaps other content that will be adding over time to enable us to also.
Add new opportunities to participate with new inventory in the sports gambling space.
Okay Awesome. So my quick follow up.
In that gambling space do you expect there to be more lumpy revenue is dependent on the season that was.
The NFL season versus the MBK season, or something like that.
Yes, I mean again I don't think sports gambling is a category will be a material component of our revenue to the point, where you would see it having a significant impact on our quarterly or seasonal growth, but that said you're absolutely correct. The football season will be that is and I think we'll continue to be the primary season for sports gambling.
And so yes in the fall and then to a lesser extent with some of the other the other leagues.
Okay perfect. Thanks.
[noise].
We have no other questions at this time.
Okay. Thank you Amber and thank you for everyone for joining our third our second quarter call. Thank you all bye bye.
Thank you that concludes today's conference. Thank you for participating you may now disconnect.